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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-4887
UMB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Missouri | 43-0903811 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
1010 Grand Boulevard, Kansas City, Missouri | 64106 | |
(Address of principal executive offices) | (ZIP Code) |
(Registrants telephone number, including area code): (816) 860-7000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer ¨ | |
Non- accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable date.
As of October 31, 2010, UMB Financial Corporation had 40,406,684 shares of common stock outstanding.
Table of Contents
FORM 10-Q
INDEX
3 | ||||||
ITEM 1. | FINANCIAL STATEMENTS (UNAUDITED) | 3 | ||||
3 | ||||||
4 | ||||||
STATEMENTS OF CHANGES IN CONDENSED CONSOLIDATED SHAREHOLDERS' EQUITY |
5 | |||||
6 | ||||||
7 | ||||||
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
21 | ||||
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 36 | ||||
ITEM 4. | CONTROLS AND PROCEDURES | 40 | ||||
41 | ||||||
ITEM 1. | LEGAL PROCEEDINGS | 41 | ||||
ITEM 1A. | RISK FACTORS | 41 | ||||
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 41 | ||||
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | 42 | ||||
ITEM 4. | RESERVED | 42 | ||||
ITEM 5. | OTHER INFORMATION | 42 | ||||
ITEM 6. | EXHIBITS | 42 | ||||
43 | ||||||
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT |
45 | |||||
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT |
46 | |||||
47 | ||||||
48 |
2
Table of Contents
PART I FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, dollars in thousands, except share and per share data)
September 30, 2010 |
December 31, 2009 |
|||||||
ASSETS |
||||||||
Loans: |
$ | 4,583,562 | $ | 4,314,705 | ||||
Allowance for loan losses |
(72,719 | ) | (64,139 | ) | ||||
Net loans |
4,510,843 | 4,250,566 | ||||||
Loans held for sale |
11,256 | 17,523 | ||||||
Investment securities: |
||||||||
Available for sale |
5,058,667 | 4,885,788 | ||||||
Held to maturity (market value of $67,177 and $58,366, respectively) |
59,910 | 56,986 | ||||||
Trading |
40,520 | 38,214 | ||||||
Federal Reserve Bank stock and other |
22,344 | 22,732 | ||||||
Total investment securities |
5,181,441 | 5,003,720 | ||||||
Federal funds sold and securities purchased under agreements to resell |
22,399 | 329,765 | ||||||
Interest-bearing due from banks |
658,347 | 1,057,195 | ||||||
Cash and due from banks |
332,699 | 458,093 | ||||||
Bank premises and equipment, net |
215,627 | 217,642 | ||||||
Accrued income |
63,990 | 64,949 | ||||||
Goodwill |
163,584 | 131,356 | ||||||
Other intangibles |
69,723 | 47,462 | ||||||
Other assets |
110,132 | 85,084 | ||||||
Total assets |
$ | 11,340,041 | $ | 11,663,355 | ||||
LIABILITIES |
||||||||
Deposits: |
||||||||
Noninterest-bearing demand |
$ | 2,778,728 | $ | 2,775,222 | ||||
Interest-bearing demand and savings |
4,278,388 | 3,904,268 | ||||||
Time deposits under $100,000 |
710,991 | 772,040 | ||||||
Time deposits of $100,000 or more |
833,708 | 1,082,958 | ||||||
Total deposits |
8,601,815 | 8,534,488 | ||||||
Federal funds purchased and repurchase agreements |
1,432,179 | 1,927,607 | ||||||
Short-term debt |
27,847 | 29,514 | ||||||
Long-term debt |
9,040 | 25,458 | ||||||
Accrued expenses and taxes |
148,927 | 107,896 | ||||||
Other liabilities |
30,053 | 22,841 | ||||||
Total liabilities |
10,249,861 | 10,647,804 | ||||||
SHAREHOLDERS EQUITY |
||||||||
Common stock, $1.00 par value; 80,000,000 shares authorized; 55,056,730 shares issued; and 40,410,612 and 40,439,607 shares outstanding, respectively |
55,057 | 55,057 | ||||||
Capital surplus |
716,278 | 712,774 | ||||||
Retained earnings |
612,265 | 562,748 | ||||||
Accumulated other comprehensive income |
67,399 | 40,454 | ||||||
Treasury stock, 14,646,118 and 14,617,123 shares, at cost, respectively |
(360,819 | ) | (355,482 | ) | ||||
Total shareholders equity |
1,090,180 | 1,015,551 | ||||||
Total liabilities and shareholders equity |
$ | 11,340,041 | $ | 11,663,355 | ||||
See Notes to Condensed Consolidated Financial Statements.
3
Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited, dollars in thousands, except share and per share data)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
INTEREST INCOME |
||||||||||||||||
Loans |
$ | 56,581 | $ | 54,478 | $ | 166,013 | $ | 160,813 | ||||||||
Securities: |
||||||||||||||||
Taxable interest |
22,026 | 25,455 | 68,301 | 80,395 | ||||||||||||
Tax-exempt interest |
7,330 | 7,554 | 21,675 | 21,742 | ||||||||||||
Total securities income |
29,356 | 33,009 | 89,976 | 102,137 | ||||||||||||
Federal funds and resell agreements |
29 | 48 | 137 | 229 | ||||||||||||
Interest-bearing due from banks |
749 | 1,181 | 3,099 | 2,965 | ||||||||||||
Trading securities |
176 | 210 | 500 | 570 | ||||||||||||
Total interest income |
86,891 | 88,926 | 259,725 | 266,714 | ||||||||||||
INTEREST EXPENSE |
||||||||||||||||
Deposits |
7,900 | 12,223 | 25,985 | 38,656 | ||||||||||||
Federal funds and repurchase agreements |
525 | 446 | 1,473 | 1,643 | ||||||||||||
Long-term debt |
83 | 361 | 441 | 1,138 | ||||||||||||
Total interest expense |
8,508 | 13,030 | 27,899 | 41,437 | ||||||||||||
Net interest income |
78,383 | 75,896 | 231,826 | 225,277 | ||||||||||||
Provision for loan losses |
7,700 | 8,300 | 24,110 | 20,600 | ||||||||||||
Net interest income after provision for loan losses |
70,683 | 67,596 | 207,716 | 204,677 | ||||||||||||
NONINTEREST INCOME |
||||||||||||||||
Trust and securities processing |
39,843 | 32,630 | 114,029 | 86,164 | ||||||||||||
Trading and investment banking |
7,897 | 6,787 | 20,454 | 20,625 | ||||||||||||
Service charges on deposits |
19,431 | 20,598 | 60,114 | 62,527 | ||||||||||||
Insurance fees and commissions |
1,554 | 1,255 | 4,540 | 3,710 | ||||||||||||
Brokerage fees |
1,746 | 1,629 | 4,679 | 5,493 | ||||||||||||
Bankcard fees |
14,555 | 11,671 | 40,554 | 33,760 | ||||||||||||
Gains on sale of securities available for sale, net |
752 | 3,306 | 7,270 | 5,198 | ||||||||||||
Other |
4,306 | 2,642 | 13,950 | 9,273 | ||||||||||||
Total noninterest income |
90,084 | 80,518 | 265,590 | 226,750 | ||||||||||||
NONINTEREST EXPENSE |
||||||||||||||||
Salaries and employee benefits |
69,044 | 60,193 | 194,849 | 177,786 | ||||||||||||
Occupancy, net |
9,162 | 8,982 | 27,007 | 25,698 | ||||||||||||
Equipment |
11,122 | 11,187 | 33,205 | 36,181 | ||||||||||||
Supplies and services |
4,822 | 4,787 | 14,209 | 15,734 | ||||||||||||
Marketing and business development |
4,426 | 4,036 | 12,561 | 11,397 | ||||||||||||
Processing fees |
11,570 | 9,659 | 33,812 | 24,803 | ||||||||||||
Legal and consulting |
4,108 | 2,763 | 8,500 | 6,954 | ||||||||||||
Bankcard |
4,292 | 3,615 | 11,842 | 10,498 | ||||||||||||
Amortization of other intangibles |
3,150 | 1,847 | 7,684 | 4,318 | ||||||||||||
Regulatory fees |
3,219 | 3,036 | 9,974 | 12,672 | ||||||||||||
Other |
5,720 | 5,152 | 20,470 | 14,738 | ||||||||||||
Total noninterest expense |
130,635 | 115,257 | 374,113 | 340,779 | ||||||||||||
Income before income taxes |
30,132 | 32,857 | 99,193 | 90,648 | ||||||||||||
Income tax provision |
7,359 | 8,859 | 27,223 | 25,022 | ||||||||||||
NET INCOME |
$ | 22,773 | $ | 23,998 | $ | 71,970 | $ | 65,626 | ||||||||
PER SHARE DATA |
||||||||||||||||
Net income basic |
$ | 0.57 | $ | 0.60 | $ | 1.80 | $ | 1.62 | ||||||||
Net income diluted |
0.57 | 0.59 | 1.78 | 1.61 | ||||||||||||
Dividends |
0.185 | 0.175 | 0.555 | 0.525 | ||||||||||||
Weighted average shares outstanding |
40,081,108 | 40,240,293 | 40,083,419 | 40,402,992 |
See Notes to Condensed Consolidated Financial Statements.
4
Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(unaudited, dollars in thousands, except per share data)
Common Stock |
Capital Surplus |
Retained Earnings |
Accumulated Other Comprehensive Income |
Treasury Stock |
Total | |||||||||||||||||||
Balance January 1, 2009 |
$ | 55,057 | $ | 707,812 | $ | 502,073 | $ | 41,105 | $ | (331,236 | ) | $ | 974,811 | |||||||||||
Comprehensive income |
||||||||||||||||||||||||
Net income |
| | 65,626 | | | 65,626 | ||||||||||||||||||
Change in unrealized gains on securities, net of tax |
| | | 15,219 | | 15,219 | ||||||||||||||||||
Total comprehensive income |
80,845 | |||||||||||||||||||||||
Cash dividends ($0.525 per share) |
| | (21,329 | ) | | | (21,329 | ) | ||||||||||||||||
Purchase of treasury stock |
| | | | (26,331 | ) | (26,331 | ) | ||||||||||||||||
Issuance of equity awards |
| (1,263 | ) | | | 1,395 | 132 | |||||||||||||||||
Recognition of equity based compensation |
| 3,948 | | | | 3,948 | ||||||||||||||||||
Net tax benefit related to equity compensation plans |
| 187 | | | | 187 | ||||||||||||||||||
Sale of treasury stock |
| 314 | | | 159 | 473 | ||||||||||||||||||
Exercise of stock options |
| 375 | | | 517 | 892 | ||||||||||||||||||
Balance September 30, 2009 |
$ | 55,057 | $ | 711,373 | $ | 546,370 | $ | 56,324 | $ | (355,496 | ) | $ | 1,013,628 | |||||||||||
Balance January 1, 2010 |
$ | 55,057 | $ | 712,774 | $ | 562,748 | $ | 40,454 | $ | (355,482 | ) | $ | 1,015,551 | |||||||||||
Comprehensive income |
||||||||||||||||||||||||
Net income |
| | 71,970 | | | 71,970 | ||||||||||||||||||
Change in unrealized gains on securities, net of tax |
| | | 26,945 | | 26,945 | ||||||||||||||||||
Total comprehensive income |
98,915 | |||||||||||||||||||||||
Cash dividends ($0.555 per share) |
| | (22,453 | ) | | | (22,453 | ) | ||||||||||||||||
Purchase of treasury stock |
| | | | (7,554 | ) | (7,554 | ) | ||||||||||||||||
Issuance of equity awards |
| (1,617 | ) | | | 1,742 | 125 | |||||||||||||||||
Recognition of equity based compensation |
| 4,398 | | | | 4,398 | ||||||||||||||||||
Net tax benefit related to equity compensation plans |
| 155 | | | | 155 | ||||||||||||||||||
Sale of treasury stock |
| 333 | | | 188 | 521 | ||||||||||||||||||
Exercise of stock options |
| 235 | | | 287 | 522 | ||||||||||||||||||
Balance September 30, 2010 |
$ | 55,057 | $ | 716,278 | $ | 612,265 | $ | 67,399 | $ | (360,819 | ) | 1,090,180 | ||||||||||||
See Notes to Condensed Consolidated Financial Statements.
Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in thousands)
Nine Months Ended September 30, |
||||||||
2010 | 2009 | |||||||
Operating Activities |
||||||||
Net Income |
$ | 71,970 | $ | 65,626 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for loan losses |
24,110 | 20,600 | ||||||
Depreciation and amortization |
28,846 | 27,943 | ||||||
Deferred income tax benefit |
(9,349 | ) | (7,088 | ) | ||||
Net increase in trading securities |
(2,306 | ) | (8,007 | ) | ||||
Gains on sales of securities available for sale |
(7,270 | ) | (5,198 | ) | ||||
Gains on sales of assets |
(105 | ) | (18 | ) | ||||
Amortization of securities premiums, net of discount accretion |
22,739 | 18,269 | ||||||
Originations of loans held for sale |
(131,607 | ) | (202,768 | ) | ||||
Net gains on sales of loans held for sale |
(648 | ) | (1,269 | ) | ||||
Proceeds from sales of loans held for sale |
138,522 | 206,513 | ||||||
Issuance of equity awards |
125 | 132 | ||||||
Equity based compensation |
4,398 | 3,948 | ||||||
Changes in: |
||||||||
Accrued income |
959 | (291 | ) | |||||
Accrued expenses and taxes |
(3,113 | ) | 8,701 | |||||
Other assets and liabilities, net |
1,630 | 18 | ||||||
Net cash provided by operating activities |
138,901 | 127,111 | ||||||
Investing Activities |
||||||||
Proceeds from maturities of securities held to maturity |
8,264 | 4,923 | ||||||
Proceeds from sales of securities available for sale |
515,256 | 89,517 | ||||||
Proceeds from maturities of securities available for sale |
1,650,870 | 2,603,346 | ||||||
Purchases of securities held to maturity |
(10,949 | ) | (5,505 | ) | ||||
Purchases of securities available for sale |
(2,318,615 | ) | (2,278,875 | ) | ||||
Net (increase) decrease in loans |
(206,467 | ) | 56,978 | |||||
Net decrease in fed funds sold and resell agreements |
307,366 | 131,138 | ||||||
Net decrease (increase) in interest-bearing balances due from other financial institutions |
95,022 | (189,238 | ) | |||||
Purchases of bank premises and equipment |
(19,755 | ) | (13,758 | ) | ||||
Net cash paid for acquisitions |
(114,405 | ) | (26,290 | ) | ||||
Proceeds from sales of bank premises and equipment |
430 | 1,437 | ||||||
Net cash (used in) provided by investing activities |
(92,983 | ) | 373,673 | |||||
Financing Activities |
||||||||
Net increase (decrease) in demand and savings deposits |
377,476 | (11,420 | ) | |||||
Net (decrease) increase in time deposits |
(310,299 | ) | 176,196 | |||||
Net decrease in fed funds purchased and repurchase agreements |
(495,428 | ) | (980,677 | ) | ||||
Net (decrease) increase in short-term debt |
(2,868 | ) | 4,529 | |||||
Proceeds from long-term debt |
| 2,000 | ||||||
Repayment of long-term debt |
(15,217 | ) | (5,567 | ) | ||||
Cash dividends paid |
(22,446 | ) | (21,322 | ) | ||||
Net tax benefit related to equity compensation plans |
155 | 187 | ||||||
Proceeds from exercise of stock options and sales of treasury shares |
1,043 | 1,365 | ||||||
Purchases of treasury stock |
(7,554 | ) | (26,331 | ) | ||||
Net cash used in financing activities |
(475,138 | ) | (861,040 | ) | ||||
Decrease in cash and due from banks |
(429,220 | ) | (360,256 | ) | ||||
Cash and due from banks at beginning of period |
1,229,645 | 887,559 | ||||||
Cash and due from banks at end of period |
$ | 800,425 | $ | 527,303 | ||||
Supplemental Disclosures: |
||||||||
Income taxes paid |
$ | 37,547 | $ | 25,627 | ||||
Total interest paid |
31,595 | 41,158 |
See Notes to Condensed Consolidated Financial Statements.
6
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)
1. Financial Statement Presentation
The condensed consolidated financial statements include the accounts of UMB Financial Corporation and its subsidiaries (collectively, the Company) after elimination of all significant intercompany transactions. In the opinion of management of the Company, all adjustments, which were of a normal recurring nature and necessary for a fair presentation of the financial position and results of operations, have been made. The results of operations and cash flows for the interim periods presented may not be indicative of the results of the full year. The financial statements should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and in conjunction with the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
In the previously filed Form 10-Q for the period ended September 30, 2009, the Company transposed proceeds from maturities and proceeds from sales of available for sale securities in the investing activities section of the condensed consolidated statement of cash flows. As a result, the accompanying 2009 condensed consolidated statement of cash flows has been corrected to list the appropriate title with the appropriate numeric total. There is no quantitative change in cash flows of the Company as a result of this adjustment.
2. Summary of Accounting Policies
The Company is a multi-bank financial holding company, which offers a wide range of banking and other financial services to its customers through its branches and offices in the states of Missouri, Kansas, Colorado, Illinois, Oklahoma, Arizona, Nebraska, Pennsylvania, South Dakota, Indiana, Wisconsin, Utah, New Jersey, and Massachusetts. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also impact reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of the significant accounting policies to assist the reader in understanding the financial presentation is listed in the Notes to Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
Interest-bearing Due From Banks
Amounts due from the Federal Reserve Bank which are interest-bearing for all periods presented, and amounts due from certificates of deposits held at other financial institutions are included in interest-bearing due from banks. The amount due from the Federal Reserve Bank totaled $467.7 million and $238.9 million at September 30, 2010 and September 30, 2009, respectively, and is considered cash and cash equivalents. The amounts due from certificates of deposit totaled $191.6 million and $300.5 million at September 30, 2010 and September 30, 2009, respectively.
This table provides a summary of cash and due from banks as presented on the Condensed Consolidated Statements of Cash Flows as of September 30, 2010 and September 30, 2009 (in thousands):
September 30, | ||||||||
2010 | 2009 | |||||||
Due from the Federal Reserve |
$ | 467,726 | $ | 238,881 | ||||
Cash and due from banks |
332,699 | 288,422 | ||||||
Cash and due from banks at end of period |
$ | 800,425 | $ | 527,303 | ||||
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Table of Contents
UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)
Per Share Data
Basic income per share is computed based on the weighted average number of shares of common stock outstanding during each period. Diluted quarterly per share data includes the dilutive effect of 218,495 and 323,413 shares issuable upon the exercise of options granted by the Company and outstanding at September 30, 2010 and 2009, respectively. Diluted year-to-date income per share includes the dilutive effect of 250,966 and 319,453 shares issuable upon the exercise of stock options granted by the Company and outstanding at September 30, 2010 and 2009, respectively.
Options issued under employee benefit plans to purchase 1,107,949 shares of common stock were outstanding at September 30, 2010, but were not included in the computation of quarterly and year-to-date diluted EPS because the options were anti-dilutive. Options issued under employee benefit plans to purchase 784,904 shares of common stock were outstanding at September 30, 2009, but were not included in the computation of quarterly and year-to-date diluted EPS because the options were anti-dilutive.
3. New Accounting Pronouncements
Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140 In June 2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 166 Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140 or Accounting Standards Codification (ASC) 860. The objective of this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferors continuing involvement, if any, in transferred financial assets. This Statement removes the concept of a qualifying special-purpose entity from SFAS No. 140 and removes the exception from applying FASB Interpretation No. 46 to qualifying special-purpose entities. The Company adopted this statement on January 1, 2010 with no impact on its financial position or results of operations.
Amendments to FASB Interpretation No. 46(R) In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) or ASC 810, which amends the consolidation guidance applicable to variable interest entities. The amendments to the consolidation guidance affect all entities currently within the scope of FIN 46(R), as well as qualifying special-purpose entities that are currently excluded from the scope of FIN 46(R). The Company adopted this statement on January 1, 2010 with no impact on its financial position or results of operations.
Fair Value Measurements and Disclosures In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, Fair Value Measurements and Disclosures (ASU 2010-06), which amends ASC 820, adding new requirements for disclosures for Levels 1 and 2, separate disclosures of purchases, sales, issuances, and settlements relating to Level 3 measurements and clarification of existing fair value disclosures. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010. The Company adopted this statement on January 1, 2010 with no impact on its financial position or results of operations except for additional financial statement disclosures.
Credit Quality of Financing Receivables and the Allowance for Credit Losses In July 2010, the FASB issued ASU No. 2010-20, Disclosures About the Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-10), which amends ASC 310 by requiring more robust and disaggregated disclosures about the credit quality of an entitys financial receivables and its allowance for credit losses. ASU 2010-20 will be effective for the Company for the annual reporting period ending December 31, 2010. The Company is currently evaluating the effect that this standard will have on its financial statement disclosures.
8
Table of Contents
UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)
4. Loans and Allowance for Loan Losses
This table provides a summary of the major categories of loans as of September 30, 2010 and December 31, 2009 (in thousands):
September 30, 2010 |
December 31, 2009 |
|||||||
Commercial, financial, and agricultural |
$ | 2,038,631 | $ | 1,963,533 | ||||
Real estate construction |
94,821 | 106,914 | ||||||
Consumer |
442,405 | 441,406 | ||||||
Real estate |
2,000,199 | 1,795,342 | ||||||
Leases |
7,506 | 7,510 | ||||||
Total loans |
4,583,562 | 4,314,705 | ||||||
Loans held for sale |
11,256 | 17,523 | ||||||
Total loans and loans held for sale |
$ | 4,594,818 | $ | 4,332,228 | ||||
This table provides an analysis of the allowance for loan losses for the three and nine months ended September 30, 2010 and 2009 (in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Beginning allowance July 1 and January 1 |
$ | 70,110 | $ | 55,109 | $ | 64,139 | $ | 52,297 | ||||||||
Additions (deductions): |
||||||||||||||||
Charge-offs |
(6,060 | ) | (5,663 | ) | (18,424 | ) | (17,905 | ) | ||||||||
Recoveries |
969 | 1,066 | 2,894 | 3,820 | ||||||||||||
Net charge-offs |
(5,091 | ) | (4,597 | ) | (15,530 | ) | (14,085 | ) | ||||||||
Provision charged to expense |
7,700 | 8,300 | 24,110 | 20,600 | ||||||||||||
Ending allowance September 30 |
$ | 72,719 | $ | 58,812 | $ | 72,719 | $ | 58,812 | ||||||||
Impaired loans Impaired loans are measured based on the present value of expected future cash flows discounted at the loans effective interest rate, at the loans observable market price, or at the fair value of the collateral securing the loan if considered collateral dependant. The summary below provides an analysis of impaired loans as of and for the nine months ended September 30, 2010 and twelve months ended December 31, 2009 (in thousands):
September 30, 2010 |
December 31, 2009 |
|||||||
Total impaired loans as of September 30 and December 31 |
$ | 23,666 | $ | 20,880 | ||||
Amount of impaired loans which have a related allowance |
6,094 | 14,290 | ||||||
Amount of related allowance |
2,852 | 3,813 | ||||||
Remaining impaired loans with no allowance |
17,572 | 6,590 | ||||||
Average recorded investment in impaired loans during the period |
22,519 | 14,974 |
There was an insignificant amount of interest recognized on impaired loans during 2010 and 2009.
9
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UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)
5. Securities
Securities Available for Sale
This table provides detailed information about securities available for sale at September 30, 2010 and December 31, 2009 (in thousands):
September 30, 2010 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
U.S. Treasury |
$ | 664,762 | $ | 5,998 | $ | | $ | 670,760 | ||||||||
U.S. Agencies |
1,567,716 | 17,174 | (9 | ) | 1,584,881 | |||||||||||
Mortgage-backed |
1,607,441 | 52,883 | (75 | ) | 1,660,249 | |||||||||||
State and political subdivisions |
1,109,266 | 30,979 | (635 | ) | 1,139,610 | |||||||||||
Corporates |
3,170 | 1 | (4 | ) | 3,167 | |||||||||||
Total |
$ | 4,952,355 | $ | 107,035 | $ | (723 | ) | $ | 5,058,667 | |||||||
December 31, 2009 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
U.S. Treasury |
$ | 596,067 | $ | 3,549 | $ | (539 | ) | $ | 599,077 | |||||||
U.S. Agencies |
1,479,784 | 10,426 | (1,450 | ) | 1,488,760 | |||||||||||
Mortgage-backed |
1,786,899 | 33,038 | (6,279 | ) | 1,813,658 | |||||||||||
State and political subdivisions |
958,231 | 26,530 | (468 | ) | 984,293 | |||||||||||
Total |
$ | 4,820,981 | $ | 73,543 | $ | (8,736 | ) | $ | 4,885,788 | |||||||
The following table presents contractual maturity information for securities available for sale at September 30, 2010 (in thousands):
Amortized Cost |
Fair Value |
|||||||
Due in 1 year or less |
$ | 693,743 | $ | 698,034 | ||||
Due after 1 year through 5 years |
2,347,519 | 2,387,206 | ||||||
Due after 5 years through 10 years |
278,099 | 287,617 | ||||||
Due after 10 years |
25,553 | 25,561 | ||||||
Total |
3,344,914 | 3,398,418 | ||||||
Mortgage-backed securities |
1,607,441 | 1,660,249 | ||||||
Total securities available for sale |
$ | 4,952,355 | $ | 5,058,667 | ||||
Securities may be disposed of before contractual maturities due to sales by the Company or because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
For the nine months ended September 30, 2010, proceeds from the sales of securities available for sale were $515,256,000 compared to $89,517,000 for the same period in 2009. Securities transactions resulted in gross realized gains of $7,499,000 and $5,198,000 for the nine months ended September 30, 2010 and 2009. The gross realized losses for the nine months ended September 30, 2010 and 2009 were $229,000 and $0, respectively.
Trading Securities
The net unrealized gains on trading securities at September 30, 2010 and September 30, 2009 were $110,000 and $293,000 respectively, and were included in trading and investment banking income.
10
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UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)
Securities Held to Maturity
The table below provides detailed information for securities held to maturity at September 30, 2010 and December 31, 2009 (in thousands):
September 30, 2010 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
State and political subdivisions |
$ | 59,910 | $ | 7,267 | $ | | $ | 67,177 | ||||||||
December 31, 2009 |
||||||||||||||||
State and political subdivisions |
$ | 56,986 | $ | 1,380 | $ | | $ | 58,366 | ||||||||
The following table presents contractual maturity information for securities held to maturity at September 30, 2010 (in thousands):
Amortized Cost |
Fair Value |
|||||||
Due in 1 year or less |
$ | 1,635 | $ | 1,833 | ||||
Due after 1 year through 5 years |
14,268 | 15,999 | ||||||
Due after 5 years through 10 years |
7,828 | 8,778 | ||||||
Due after 10 years |
36,179 | 40,567 | ||||||
Total securities held to maturity |
$ | 59,910 | $ | 67,177 | ||||
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
There were no sales of securities held to maturity during the first nine months of 2010 and 2009.
Securities available for sale with a market value of $3,557,004,106 at September 30, 2010, and $4,227,243,117 at December 31, 2009, were pledged to secure U.S. Government deposits, other public deposits and certain trust deposits as required by law.
The following table shows the Companys available for sale investments gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2010 and December 31, 2009 (in thousands):
September 30, 2010 |
Less than 12 months | 12 months or more | Total | |||||||||||||||||||||
Description of Securities |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
||||||||||||||||||
Direct obligations of U.S. government agencies |
$ | 7,263 | $ | (9 | ) | $ | | $ | | $ | 7,263 | $ | (9 | ) | ||||||||||
Federal agency mortgage backed securities |
42,757 | (75 | ) | | | 42,757 | (75 | ) | ||||||||||||||||
Municipal securities |
73,769 | (635 | ) | | | 73,769 | (635 | ) | ||||||||||||||||
Corporates |
2,282 | (4 | ) | | | 2,282 | (4 | ) | ||||||||||||||||
Total temporarily-impaired debt securities available for sale |
$ | 126,071 | $ | (723 | ) | $ | | $ | | $ | 126,071 | $ | (723 | ) | ||||||||||
11
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UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)
December 31, 2009 |
Less than 12 months | 12 months or more | Total | |||||||||||||||||||||
Description of Securities |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
||||||||||||||||||
U.S. Treasury obligations |
$ | 169,516 | $ | (539 | ) | $ | | $ | | $ | 169,516 | $ | (539 | ) | ||||||||||
Direct obligations of U.S. government agencies |
373,255 | (1,450 | ) | | | 373,255 | (1,450 | ) | ||||||||||||||||
Federal agency mortgage backed securities |
398,111 | (6,279 | ) | | | 398,111 | (6,279 | ) | ||||||||||||||||
Municipal securities |
44,921 | (427 | ) | 1,711 | (41 | ) | 46,632 | (468 | ) | |||||||||||||||
Total temporarily-impaired debt securities |
$ | 985,803 | $ | (8,695 | ) | $ | 1,711 | $ | (41 | ) | $ | 987,514 | $ | (8,736 | ) | |||||||||
The unrealized losses in the Companys investments in direct obligations of U.S. government agencies, federal agency mortgage backed securities, and municipal securities were caused by interest rate risk. Because the Company does not have the intent to sell these securities and it is more likely than not that the Company will not be required to sell these securities before a recovery of fair value, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2010.
6. Goodwill and Other Intangibles
Changes in the carrying amount of goodwill for the periods ended September 30, 2010 and December 31, 2009 by operating segment are as follows (in thousands):
Commercial Financial Services |
Institutional Financial Services |
Personal Financial Services |
Total | |||||||||||||
Balances as of January 1, 2009 |
$ | 42,999 | $ | 25,988 | $ | 35,937 | $ | 104,924 | ||||||||
Acquisition of J.D. Clark & Co., Inc. |
| 19,476 | | 19,476 | ||||||||||||
Other goodwill acquired during period |
5,875 | 1,355 | 7,230 | |||||||||||||
Other |
(154 | ) | | (120 | ) | (274 | ) | |||||||||
Balances as of December 31, 2009 |
$ | 42,845 | $ | 51,339 | $ | 37,172 | $ | 131,356 | ||||||||
Balances as of January 1, 2010 |
$ | 42,845 | $ | 51,339 | $ | 37,172 | $ | 131,356 | ||||||||
Acquisition of Prairie Capital Management, LLC |
| | 32,228 | 32,228 | ||||||||||||
Balances as of September 30, 2010 |
$ | 42,845 | $ | 51,339 | $ | 69,400 | $ | 163,584 | ||||||||
12
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UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)
As of September 30, 2010 | ||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||
Core deposit intangibles assets |
$ | 36,497 | $ | 26,204 | $ | 10,293 | ||||||
Other intangible assets |
44,681 | 13,861 | 30,820 | |||||||||
Other intangible assets acquired from the acquisition of Prairie Capital Management, LLC |
19,418 | 407 | 19,011 | |||||||||
Other intangible assets acquired during period |
10,526 | 927 | 9,599 | |||||||||
Total other intangible assets |
74,625 | 15,195 | 59,430 | |||||||||
Total intangible assets |
$ | 111,122 | $ | 41,399 | $ | 69,723 | ||||||
As of December 31, 2009 | ||||||||||||
Core deposit intangible assets |
$ | 36,497 | $ | 24,444 | $ | 12,053 | ||||||
Other intangible assets |
9,151 | 6,812 | 2,315 | |||||||||
Other intangible assets acquired from the acquisition of J.D. Clark & Co., Inc. |
24,831 | 2,278 | 22,553 | |||||||||
Other intangible assets acquired during period |
10,699 | 182 | 10,541 | |||||||||
Total other intangible assets |
44,681 | 9,272 | 35,409 | |||||||||
Total intangible assets |
$ | 81,178 | $ | 33,716 | $ | 47,462 | ||||||
Following is the aggregate amortization expense recognized in each period (in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Aggregate amortization expense |
$ | 3,150 | $ | 1,847 | $ | 7,684 | $ | 4,318 | ||||||||
Estimated amortization expense of intangible assets on future years (in thousands):
For the three months ended December 31, 2010 |
$ | 3,020 | ||
For the year ended December 31, 2011 |
11,342 | |||
For the year ended December 31, 2012 |
9,987 | |||
For the year ended December 31, 2013 |
8,856 | |||
For the year ended December 31, 2014 |
8,100 |
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UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)
7. Other Comprehensive Income
The Companys only component of other comprehensive income for the three and nine months ended September 30, 2010 and 2009 was the net unrealized gains and losses on available for sale securities (in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Change in unrealized holding gains, net |
$ | 11,856 | $ | 22,310 | $ | 49,770 | $ | 29,222 | ||||||||
Less: Reclassification adjustments for gains included in income |
(752 | ) | (3,306 | ) | (7,270 | ) | (5,198 | ) | ||||||||
Net unrealized holding gains |
11,104 | 19,004 | 42,500 | 24,024 | ||||||||||||
Income tax expense |
(4,082 | ) | (6,918 | ) | (15,555 | ) | (8,805 | ) | ||||||||
Other comprehensive income |
$ | 7,022 | $ | 12,086 | $ | 26,945 | $ | 15,219 | ||||||||
8. Commitments, Contingencies and Guarantees
In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, commercial letters of credit, standby letters of credit, futures contracts, forward foreign exchange contracts and spot foreign exchange contracts. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheet. The contract or notional amount of those instruments reflects the extent of involvement the Company has in particular classes of financial instruments. Many of the commitments expire without being drawn upon; therefore, the total amount of these commitments does not necessarily represent the future cash requirements of the Company.
The following table summarizes the Companys off-balance-sheet financial instruments.
Contract or Notional Amount (in thousands):
September 30, 2010 |
December 31, 2009 |
|||||||
Commitments to extend credit for loans (excluding credit card loans) |
$ | 1,740,185 | $ | 1,868,869 | ||||
Commitments to extend credit under credit card loans |
1,454,829 | 1,320,416 | ||||||
Commercial letters of credit |
2,386 | 3,538 | ||||||
Standby letters of credit |
281,556 | 308,866 | ||||||
Futures contracts |
19,000 | 13,300 | ||||||
Forward foreign exchange contracts |
24,317 | 69,342 | ||||||
Spot foreign exchange contracts |
6,040 | 5,513 |
The Companys exposure to credit loss in the event of nonperformance by the counterparty to the financial instruments for commitments to extend credit, commercial letters of credit, and standby letters of credit is represented by the contract or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
In the normal course of business, the Company and its subsidiaries are named defendants in various lawsuits and counter-claims. In the opinion of management, after consultation with legal counsel, none of these lawsuits are expected to have a materially adverse effect on the financial position, results of operations or cash flows of the Company.
14
Table of Contents
UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)
9. Business Segment Reporting
The Company has strategically aligned its operations into the following three reportable segments (collectively, Business Segments): Commercial Financial Services, Institutional Financial Services, and Personal Financial Services. The Business Segments were redefined during the first quarter of 2010 to better organize the Companys business around customer needs. In 2009, the Business Segments were Commercial Banking and Lending, Payment and Technology Solutions, Banking Services, Consumer Services, Asset Management, and Fund Services. Business segment financial results produced by the Companys internal management accounting system are evaluated regularly by the Executive Committee in deciding how to allocate resources and assess performance for individual Business Segments. The management accounting system assigns balance sheet and income statement items to each business segment using methodologies that are refined on an ongoing basis. For comparability purposes, amounts in all periods are based on methodologies in effect at September 30, 2010.
The following summaries provide information about the activities of each segment:
Commercial Financial Services resulted in combining Commercial Banking and Lending with Treasury Management (previously a component of Payment and Technology Solutions). Commercial Financial Services serves the commercial lending and leasing, capital markets, and treasury management needs of the Companys mid-market businesses and governmental entities by offering various products and services. Such services include commercial loans, letters of credit, loan syndication services, consultative services, and a variety of financial options for companies that need non-traditional banking services. Capital markets services include asset-based financing, asset securitization, equity and mezzanine financing, factoring, private and public placement of senior debt, as well as merger and acquisition consulting. Treasury management services include depository services, account reconciliation services, electronic fund transfer services, controlled disbursements, lockbox services, and remote deposit capture services.
Institutional Financial Services is a combination of Banking Services, Fund Services, and Asset Management services provided to institutional clients. This segment also includes consumer credit card services, formerly included in Consumer Services, and commercial credit card services, formerly included in Payment and Technology Solutions. Healthcare services, mutual fund cash management and international payments, previously included in Payment and Technology Solutions, are also included in this segment. Institutional Financial Services includes businesses such as the Companys institutional investment services functions, Scout Investment Advisors, UMB Fund Services, corporate trust and escrow services as well as correspondent banking, investment banking, and UMB Healthcare Services. Products and services include bond trading transactions, cash letter collections, FiServ account processing, investment portfolio accounting and safekeeping, reporting for asset/liability management, and Fed funds transactions. UMB Fund Services provides fund administration and accounting, investor services and transfer agency, marketing and distribution, custody and alternative investment services.
Personal Financial Services combines Consumer Services and Asset Management services provided to personal clients. This segment combines the Companys consumer bank with the individual investment and wealth management solutions. The range of services offered to UMB clients extends from a basic checking account to estate planning and trust services. Products and services include the Companys bank branches, call center, internet banking and ATM network, deposit accounts, private banking, installment loans, home equity lines of credit, residential mortgages, small business loans, brokerage services, and insurance services in addition to a full spectrum of investment advisory, trust, and custody services.
Treasury and Other Adjustments includes asset and liability management activities and miscellaneous other items of a corporate nature not allocated to specific business lines. The assets within this segment include the Companys investment portfolio. Corporate eliminations are also allocated to this segment.
15
Table of Contents
UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)
Business Segment Information
Segment financial results were as follows (in thousands):
Three Months Ended September 30, | ||||||||||||||||
Commercial Financial Services |
Institutional Financial Services |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net interest income |
$ | 38,859 | $ | 39,428 | $ | 13,414 | $ | 13,433 | ||||||||
Provision for loan losses |
2,727 | 4,972 | 4,505 | 2,946 | ||||||||||||
Noninterest income |
8,740 | 8,166 | 55,617 | 45,479 | ||||||||||||
Noninterest expense |
28,960 | 26,867 | 52,892 | 43,299 | ||||||||||||
Income before income taxes |
$ | 15,912 | $ | 15,755 | $ | 11,634 | $ | 12,667 | ||||||||
Average assets |
$ | 3,660,000 | $ | 3,507,000 | $ | 721,000 | $ | 540,000 | ||||||||
Depreciation and amortization |
2,166 | 2,238 | 3,856 | 3,126 | ||||||||||||
Expenditures for additions to premises and equipment |
1,730 | 1,456 | 3,455 | 2,157 | ||||||||||||
Personal
Financial Services |
Treasury and Other Adjustments |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net interest income |
$ | 26,110 | $ | 23,002 | $ | | $ | 33 | ||||||||
Provision for loan losses |
468 | 382 | | | ||||||||||||
Noninterest income |
24,857 | 23,597 | 870 | 3,276 | ||||||||||||
Noninterest expense |
48,439 | 46,062 | 344 | (971 | ) | |||||||||||
Income before income taxes |
$ | 2,060 | $ | 155 | $ | 526 | $ | 4,280 | ||||||||
Average assets |
$ | 765,000 | $ | 812,000 | $ | 5,856,000 | $ | 4,988,000 | ||||||||
Depreciation and amortization |
3,447 | 3,376 | 698 | 565 | ||||||||||||
Expenditures for additions to premises and equipment |
3,085 | 1,395 | 990 | 462 | ||||||||||||
Total Consolidated Company | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Net interest income |
$ | 78,383 | $ | 75,896 | ||||||||||||
Provision for loan losses |
7,700 | 8,300 | ||||||||||||||
Noninterest income |
90,084 | 80,518 | ||||||||||||||
Noninterest expense |
130,635 | 115,257 | ||||||||||||||
Income before income taxes |
$ | 30,132 | $ | 32,857 | ||||||||||||
Average assets |
$ | 11,002,000 | $ | 9,847,000 | ||||||||||||
Depreciation and amortization |
10,167 | 9,305 | ||||||||||||||
Expenditures for additions to premises and equipment |
9,260 | 5,470 |
16
Table of Contents
UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)
Nine Months Ended September 30, | ||||||||||||||||
Commercial
Financial Services |
Institutional Financial Services |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net interest income |
$ | 115,262 | $ | 114,399 | $ | 38,324 | $ | 42,589 | ||||||||
Provision for loan losses |
8,351 | 10,275 | 14,220 | 9,451 | ||||||||||||
Noninterest income |
25,893 | 24,538 | 161,863 | 128,699 | ||||||||||||
Noninterest expense |
87,188 | 82,292 | 147,855 | 120,134 | ||||||||||||
Income before income taxes |
$ | 45,616 | $ | 46,370 | $ | 38,112 | $ | 41,703 | ||||||||
Average assets |
$ | 3,554,000 | $ | 3,515,000 | $ | 701,000 | $ | 511,000 | ||||||||
Depreciation and amortization |
6,708 | 7,204 | 11,154 | 8,262 | ||||||||||||
Expenditures for additions to premises and equipment |
3,744 | 4,505 | 8,433 | 6,933 | ||||||||||||
Personal
Financial Services |
Treasury and Other Adjustments |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net interest income |
$ | 78,245 | $ | 68,286 | $ | (5 | ) | $ | 3 | |||||||
Provision for loan losses |
1,539 | 874 | | | ||||||||||||
Noninterest income |
71,437 | 69,585 | 6,397 | 3,928 | ||||||||||||
Noninterest expense |
135,084 | 137,777 | 3,986 | 576 | ||||||||||||
Income before income taxes |
$ | 13,059 | $ | (780 | ) | $ | 2,406 | $ | 3,355 | |||||||
Average assets |
$ | 767,000 | $ | 849,000 | $ | 5,934,000 | $ | 5,156,000 | ||||||||
Depreciation and amortization |
9,390 | 11,106 | 1,594 | 1,371 | ||||||||||||
Expenditures for additions to premises and equipment |
6,136 | 3,564 | 1,442 | 743 | ||||||||||||
Total Consolidated Company | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Net interest income |
$ | 231,826 | $ | 225,277 | ||||||||||||
Provision for loan losses |
24,110 | 20,600 | ||||||||||||||
Noninterest income |
265,590 | 226,750 | ||||||||||||||
Noninterest expense |
374,113 | 340,779 | ||||||||||||||
Income before income taxes |
$ | 99,193 | $ | 90,648 | ||||||||||||
Average assets |
$ | 10,956,000 | $ | 10,031,000 | ||||||||||||
Depreciation and amortization |
28,846 | 27,943 | ||||||||||||||
Expenditures for additions to premises and equipment |
19,755 | 15,745 |
17
Table of Contents
UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)
10. Fair Value Measurements
The following table presents information about the Companys assets measured at fair value on a recurring basis as of September 30, 2010, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.
Fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets and liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy. In such cases, the fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Assets measured at fair value on a recurring basis as of September 30, 2010 (in thousands):
September 30, 2010 |
Fair Value Measurement at Reporting Date Using | |||||||||||||||
Description |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
U.S. Treasury |
$ | 650 | $ | 650 | $ | | $ | | ||||||||
U.S. Agencies |
17,429 | 17,429 | | | ||||||||||||
Mortgage-backed |
4,835 | | 4,835 | | ||||||||||||
State and political subdivisions |
4,317 | | 4,317 | | ||||||||||||
Trading other |
13,289 | 13,550 | (261 | ) | | |||||||||||
Trading securities |
40,520 | 31,629 | 8,891 | | ||||||||||||
U.S. Treasury |
670,760 | 670,760 | | | ||||||||||||
U.S. Agencies |
1,584,881 | 1,584,881 | | | ||||||||||||
Mortgage-backed |
1,660,249 | | 1,660,249 | | ||||||||||||
State and political subdivisions |
1,139,610 | | 1,139,610 | | ||||||||||||
Corporates |
3,167 | 3,167 | | | ||||||||||||
Available for sale securities |
5,058,667 | 2,258,808 | 2,799,859 | | ||||||||||||
Total |
$ | 5,099,187 | $ | 2,290,437 | $ | 2,808,750 | $ | | ||||||||
The fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis is required to be disclosed. The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash and Short-Term Investments The carrying amounts of cash and due from banks, federal funds sold and resell agreements are reasonable estimates of their fair values.
Securities Available for Sale Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
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UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)
Trading Securities Fair values for trading securities (including financial futures), are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities.
Loans Fair values are estimated for portfolios with similar financial characteristics. Loans are segregated by type, such as commercial, real estate, consumer, and credit card. Each loan category is further segmented into fixed and variable interest rate categories. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit rating and for the same remaining maturities.
Deposit Liabilities The fair value of demand deposits and savings accounts is the amount payable on demand at September 30, 2010 and December 31, 2009. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates that are currently offered for deposits of similar remaining maturities.
Short-Term Debt The carrying amounts of federal funds purchased, repurchase agreements and other short-term debt are reasonable estimates of their fair value because of the short-term nature of their maturities.
Long-Term Debt Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
Other Off-Balance Sheet Instruments The fair value of loan commitments and letters of credit are determined based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the present creditworthiness of the counterparties. Neither the fees earned during the year on these instruments nor their fair values at September 30, 2010 are significant to the Companys consolidated financial position.
The estimated fair value of the Companys financial instruments at September, 30, 2010 and December 31, 2009 are as follows (in millions):
September 30 2010 |
December 31 2009 |
|||||||||||||||
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
|||||||||||||
FINANCIAL ASSETS |
||||||||||||||||
Cash and short-term investments |
$ | 1,013.4 | $ | 1,013.4 | $ | 1,845.1 | 1,845.1 | |||||||||
Securities available for sale |
5,058.7 | 5,058.7 | 4,885.8 | 4,885.8 | ||||||||||||
Securities held to maturity |
59.9 | 59.9 | 57.0 | 57.0 | ||||||||||||
Federal Reserve Bank and other stock |
22.3 | 22.3 | 22.7 | 22.7 | ||||||||||||
Trading securities |
40.5 | 40.5 | 38.2 | 38.2 | ||||||||||||
Loans (exclusive of allowance for loan loss) |
4,594.8 | 4,679.3 | 4,268.1 | 4,395.1 | ||||||||||||
FINANCIAL LIABILITIES |
||||||||||||||||
Demand and savings deposits |
7,057.1 | 7,057.1 | 6,679.5 | 6,679.5 | ||||||||||||
Time deposits |
1,544.7 | 1,558.8 | 1,855.0 | 1,874.7 | ||||||||||||
Federal funds and repurchase agreements |
1,432.2 | 1,432.1 | 1,927.6 | 1,927.6 | ||||||||||||
Short-term debt |
27.8 | 27.9 | 29.5 | 29.6 | ||||||||||||
Long-term debt |
9.0 | 9.7 | 25.5 | 27.8 | ||||||||||||
OFF-BALANCE SHEET ARRANGEMENTS |
||||||||||||||||
Commitments to extend credit for loans |
4.2 | 4.7 | ||||||||||||||
Commercial letters of credit |
0.2 | 0.2 | ||||||||||||||
Standby letters of credit |
281.6 | 1.5 | 308.9 | 1.6 |
The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2010 and December 31, 2009. The estimated market values have not been updated since September 30, 2010; therefore current estimates of fair value may differ significantly from the amounts presented above.
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UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)
11. Acquisition
On July 30, 2010, UMB Advisors, LLC (UMB Advisors) and UMB Merchant Banc, LLC (UMBMB, together with UMB Advisors, the Buyers), a subsidiary of UMB Financial Corporation, completed the purchase of substantially all of the assets of Prairie Capital Management LLC (Prairie Capital) and PCM LLC (PCM) for cash of $25.9 million. Prairie Capital is in the business of providing investment management services, and PCM is the general partner of various investment funds and associated with Prairie Capitals business. UMB Advisors purchased substantially all of the assets of Prairie Capitals business, and UMBMB purchased substantially all of the assets of PCMs business. This acquisition increased the Companys assets under management base by $2.2 billion and increased the Companys servicing assets by $2.6 billion. Goodwill amounted to $32.2 million with the remaining purchase price allocated to cash, furniture, fixtures, prepaid assets, and unearned income. Identifiable intangible assets amounted to $19.4 million. Total goodwill and intangible assets are inclusive of contingent earn-out payments based on revenue targets over the next five years. This earn-out liability was estimated to be $26.0 million at the purchase date.
On September 1, 2010, Scout Investment Advisors, Inc. (Scout), a wholly-owned subsidiary of UMB Financial Corporation, entered into an asset purchase agreement with Reams Asset Management Company, LLC (Reams), MME Investments, LLC, Mark M. Egan, David B. McKinney, Hilltop Capital, LLC, Thomas M. Fink, Stephen T. Vincent, Todd C. Thompson, Deanne B. Olson, and Daniel P. Spurgeon to purchase substantially all of the assets of Reams. Reams is a provider of investment management services to institutional clients and a manager of over $9.8 billion in fixed income assets. Under the purchase agreement, at closing, Scout will pay Reams an initial cash payment of $42.0 million, plus or minus a purchase price adjustment based upon Reams accrued revenues, prepaid expenses and accrued expenses, less a certain amount of cash. Reams will also be entitled to receive $1 million worth of unregistered common stock of UMB if at least ninety-five percent of the revenue of Reams is retained by Scout on the determination date as defined in the purchase agreement. Reams may also be entitled to receive annual earn-out payments during the next five years based upon performance measures defined by the purchase agreement for each year. This transaction is scheduled to close on November 30, 2010.
Following the closing of the transaction, Reams business will be operated as a division of Scout. Each of Mr. Egan, Mr. McKinney, Mr. Fink, Mr. Thompson, Ms. Olson, Mr. Vincent, and Mr. Spurgeon will continue to serve as officers of such division. Under employment agreements, they will be subject to non-competition, non-solicitation and confidentiality provisions.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This review highlights the material changes in the results of operations and changes in financial condition for the three-month and nine-month periods ended September 30, 2010. It should be read in conjunction with the accompanying condensed consolidated financial statements, notes to condensed consolidated financial statements and other financial statistics appearing elsewhere in this report. Results of operations for the periods included in this review are not necessarily indicative of results to be attained during any future period.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
The information included or incorporated by reference in this report contains forward-looking statements of expected future developments within the meaning of and pursuant to the safe harbor provisions established by Section 21E of the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. These forward-looking statements may refer to financial condition, results of operations, plans, objectives, future financial performance and business of the Company, including, without limitation:
| Statements that are not historical in nature; and |
| Statements preceded by, followed by or that include the words believes, expects, may, should, could, anticipates, estimates, intends, or similar words or expressions; |
Forward-looking statements are not guarantees of future performance or results. You are cautioned not to put undue reliance on any forward-looking statement which speaks only as of the date it was made. Forward-looking statements reflect managements expectations and are based on currently available data; however, they involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:
| General economic and political conditions, either nationally, internationally or in the Companys footprint, may be less favorable than expected; |
| Legislative or regulatory changes; |
| Changes in the interest rate environment; |
| Changes in the securities markets impacting mutual fund performance and flows; |
| Changes in operations; |
| Changes in accounting rules; |
| The ability to successfully and timely integrate acquisitions; |
| Competitive pressures among financial services companies may increase significantly; |
| Changes in technology may be more difficult or expensive than anticipated; |
| Changes in the ability of customers to repay loans; |
| Changes in loan demand may adversely affect liquidity needs; and |
| Changes in employee costs. |
Any forward-looking statements should be read in conjunction with information about risks and uncertainties set forth in this report and in documents incorporated herein by reference. Forward-looking statements speak only as of the date they are made, and the Company does not intend to review or revise any particular forward-looking statement in light of events that occur thereafter or to reflect the occurrence of unanticipated events.
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Overview
The Company focuses on the following four core strategies. Management believes these strategies will continue to improve net income and strengthen the balance sheet.
The first strategy is to grow the Companys fee-based businesses. The emphasis on fee-based operations helps reduce the Companys exposure to changes in interest rates. During the third quarter of 2010, noninterest income increased $9.6 million, or 11.9 percent, compared to the same period of 2009. The Company continues to emphasize its asset management, bankcard services, health care services, and treasury management solution businesses. In particular, during the third quarter of 2010, the increase in noninterest income is primarily attributable to increased trust and securities processing income. The increase in these fees for the three month period compared to the same period last year was primarily attributable to an increase in fee income from Scout Funds, fund administration and custody services, and revenues from the acquisition of Prairie Capital Management, LLC. Fee income from the Scout Funds increased by $3.2 million, or 36.0 percent, fund administration and custody services fees increased by $1.8 million, or 12.9 percent, and $1.6 million in increased fee revenues due to the acquisition.
The second strategy is a focus on net interest income through loan and deposit growth, which includes a focus on rate, volume and mix. Net interest income increased $2.5 million for the three months ended September 30, 2010, compared to one year ago. Total loans increased $268.6 million, or 6.2 percent, compared to third quarter of 2009. Total deposits increased $711.6 million, or 9.0 percent, compared to third quarter of 2009. , Of the total deposit growth, 25.9 percent came from non-interest-bearing deposits and is a primary driver of the decrease in total interest expense of $4.5 million, or 34.7 percent. Average earning assets increased by $1.1 billion, or 11.8 percent, compared to the third quarter of 2009 due to the increased deposit funding.
The third strategy is a focus on improving operating efficiencies. At September 30, 2010, the Company had 133 branches. Efficient utilization of our distribution network remains a priority. The Company emphasizes increasing its customer base by providing a broad offering of services through our existing network. These efforts have resulted in the total deposits growth previously discussed. The Companys efficiency ratio for the quarter was 75.7 percent in 2010 and 71.7 percent in 2009. The Company continues to evaluate its cost structure for opportunities to moderate expense growth without sacrificing growth initiatives. The Company also continues to focus on cost savings through technology solutions that improve and automate processes.
The fourth strategy is a focus on capital management. Specifically, the Company continues to invest in organic growth; acquisition opportunities that make sense strategically, financially, operationally, and culturally; and focus on returning capital to shareholders. As an example of the Company putting capital to work, bankcard fees increased by $2.9 million, or 24.7 percent, for the three months ended September 30, 2010, compared to the same periods one year ago. This increase is directly associated with the acquisition of credit card portfolios since third quarter 2009. The Company repurchased 70,799 shares of common stock at an average price of $33.98 per share during the third quarter of 2010. The Company places a significant emphasis on the maintenance of a strong capital position, which management believes promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Companys ability to capitalize on business growth and acquisition opportunities. At September 30, 2010, the Company had $1.1 billion in shareholders equity, which resulted in a total risk-based capital ratio of 13.78 percent. This capital ratio is substantially higher than the 10 percent regulatory minimum to be considered well-capitalized.
Earnings Summary
The Company recorded consolidated net income of $22.8 million for the three-month period ended September 30, 2010, compared to $24.0 million for the same period a year earlier. This represents a 5.1 percent decrease over the three-month period ended September 30, 2009. Basic earnings per share for the third quarter of 2010 were $0.57 per share ($0.57 per share fully-diluted) compared to $0.60 per share ($0.59 per share fully-diluted) for the third quarter of 2009. Return on average assets and return on average common shareholders equity for the three-month period ended September 30, 2010 were 0.82 and 8.31 percent, respectively, compared to 0.97 and 9.43 percent for the three-month period ended September 30, 2009.
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The Company recorded consolidated net income of $72.0 million for the nine-month period ended September 30, 2010, compared to $65.6 million for the same period a year earlier. This represents a 9.7 percent increase over the nine-month period ended September 30, 2009. Basic earnings per share for the nine-month period ended September 30, 2010 were $1.80 per share ($1.78 per share fully-diluted) compared to $1.62 per share ($1.61 per share fully-diluted) for the period in 2009. Return on average assets and return on average common shareholders equity for the nine-month period ended September 30, 2010 were 0.88 and 9.09 percent, respectively, compared to 0.87 and 8.78 percent for the same period in 2009.
Net interest income for the three and nine-month periods ended September 30, 2010 increased $2.5 million, or 3.3 percent, and $6.5 million, or 2.9 percent, respectively, compared to the same period in 2009. These increases are primarily due to the reduced level of interest expense on deposits, which outpaced the reduction in interest income during both periods. For the three-month period ended September 30, 2010, average earning assets increased by $1.1 billion, or 11.8 percent, and for the nine-month period ended September 30, 2010, they increased by $839.6, or 9.1 percent, compared to the same periods in 2009. Net interest margin, on a tax-equivalent basis, decreased to 3.23 percent and 3.24 percent for the three and nine-months periods ended September 30, 2010, compared to 3.51 percent and 3.44 percent for the same periods in 2009. These changes are discussed in greater detail below under Net Interest Income.
The provision for loan losses decreased by $0.6 million and increased by $3.5 million for the three and nine-month periods ended September 30, 2010, compared to the same periods in 2009. These changes are a direct result of applying the Companys methodology for computing the allowance for loan losses. The allowance for loan losses as a percentage of total loans increased by 22 basis points to 1.59 percent as of September 30, 2010, compared to September 30, 2009. For a description of the Companys methodology for computing the allowance for loan losses, please see the summary discussion of the Allowance for Loan Losses within the Critical Accounting Policies and Estimates subsection of the Managements Discussion and Analysis of Financial Condition and Results of Operations section in the Companys 2009 Annual Report on Form 10-K.
Noninterest income increased by $9.6 million, or 11.9 percent, for the three-month period ended September 30, 2010 and increased by $38.8 million, or 17.1 percent, for the nine-month period ended September 30, 2010, compared to the same periods one year ago. These increases are discussed in greater detail below under Noninterest Income.
Noninterest expense increased by $15.4 million, or 13.3 percent, for the three-month period ended September 30, 2010, and increased by $33.3 million, or 9.8 percent, for the nine-month period ended September 30, 2010, compared to the same periods in 2009. These increases are discussed in greater detail below under Noninterest Expense.
Net Interest Income
Net interest income is a significant source of the Companys earnings and represents the amount by which interest income on earning assets exceeds the interest expense paid on liabilities. The volume of interest-earning assets and the related funding sources, the overall mix of these assets and liabilities, and the rates paid on each affect net interest income. For the three-month period ended September 30, 2010, net interest income increased $2.5 million, or 3.3 percent, compared to the same period in 2009. For the nine-month period ended September 30, 2010, net interest income increased $6.5 million, or 2.9 percent, compared to the same period in 2009.
Table 1 shows the impact of earning asset rate changes compared to changes in the cost of interest-bearing liabilities. The Company continues to experience a repricing of these earning assets and interest-bearing liabilities during the recent interest rate cycle. While the Company continues to see declining rates, it has been able to improve net interest income. As illustrated in this table, net interest spread for the three months ended September 30, 2010 decreased by 19 basis points and net interest margin decreased by 28 basis points compared to the same period in 2009. Net interest spread for the nine months ended September 30, 2010 decreased by 12 basis points and net interest margin decreased by 21 basis points compared to the same period in 2009. These results are due to a favorable volume variance on earning assets coupled with a favorable rate variance on deposits, which has more than offset the unfavorable rate variance on earning assets. The combined impact of these variances has led to an increase in the Companys net interest income.
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The favorable rate variance on deposits is bolstered by the contribution from free funds. For the impact of the contribution from free funds, see the Analysis of Net Interest Margin within Table 2 below. Table 2 also illustrates how the changes in volume and rates have resulted in an increase in net interest income.
Table 1
AVERAGE BALANCES/YIELDS AND RATES (tax-equivalent basis) (unaudited, dollars in thousands)
The following table presents, for the periods indicated, the average earning assets and resulting yields, as well as the average interest-bearing liabilities and resulting yields, expressed in both dollars and rates. All average balances are daily average balances. The average yield on earning assets without the tax equivalent basis adjustment would have been 3.07 percent for the three-month period ended September 30, 2010 and 3.89 percent for the same period in 2009.
Three Months Ended September 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Average Balance |
Average Yield/Rate |
Average Balance |
Average Yield/Rate |
|||||||||||||
Assets |
||||||||||||||||
Loans, net of unearned interest |
$ | 4,569,900 | 4.92 | % | $ | 4,354,961 | 4.97 | % | ||||||||
Securities: |
||||||||||||||||
Taxable |
4,044,955 | 2.16 | 3,175,441 | 3.18 | ||||||||||||
Tax-exempt |
1,089,222 | 4.14 | 984,534 | 4.73 | ||||||||||||
Total securities |
5,134,177 | 2.58 | 4,159,975 | 3.55 | ||||||||||||
Federal funds and resell agreements |
23,462 | 0.49 | 40,057 | 0.48 | ||||||||||||
Interest-bearing due from banks |
365,481 | 0.81 | 473,868 | 0.99 | ||||||||||||
Trading |
41,197 | 1.79 | 37,250 | 2.47 | ||||||||||||
Total earning assets |
10,134,217 | 3.56 | 9,066,111 | 4.08 | ||||||||||||
Allowance for loan losses |
(70,385 | ) | (57,957 | ) | ||||||||||||
Other assets |
938,083 | 839,486 | ||||||||||||||
Total assets |
$ | 11,001,915 | $ | 9,847,640 | ||||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||
Interest-bearing deposits |
$ | 5,574,615 | 0.56 | % | $ | 5,171,736 | 0.94 | % | ||||||||
Federal funds and repurchase agreements |
1,459,219 | 0.14 | 1,184,647 | 0.15 | ||||||||||||
Borrowed funds |
36,635 | 0.90 | 50,285 | 2.85 | ||||||||||||
Total interest-bearing liabilities |
7,070,469 | 0.48 | 6,406,668 | 0.81 | ||||||||||||
Noninterest-bearing demand deposits |
2,711,061 | 2,297,832 | ||||||||||||||
Other liabilities |
133,474 | 133,028 | ||||||||||||||
Shareholders equity |
1,086,911 | 1,010,112 | ||||||||||||||
Total liabilities and shareholders equity |
$ | 11,001,915 | $ | 9,847,640 | ||||||||||||
Net interest spread |
3.08 | % | 3.27 | % | ||||||||||||
Net interest margin |
3.23 | 3.51 |
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Nine Months Ended September 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Average Balance |
Average Yield/Rate |
Average Balance |
Average Yield/Rate |
|||||||||||||
Assets |
||||||||||||||||
Loans, net of unearned interest |
$ | 4,451,687 | 4.99 | % | $ | 4,400,316 | 4.89 | % | ||||||||
Securities: |
||||||||||||||||
Taxable |
3,897,936 | 2.34 | 3,361,316 | 3.20 | ||||||||||||
Tax-exempt |
1,016,550 | 4.42 | 911,449 | 4.96 | ||||||||||||
Total securities |
4,914,486 | 2.77 | 4,272,765 | 3.57 | ||||||||||||
Federal funds and resell agreements |
51,568 | 0.36 | 57,322 | 0.53 | ||||||||||||
Interest-bearing due from banks |
619,288 | 0.67 | 473,040 | 0.84 | ||||||||||||
Trading |
39,281 | 1.83 | 33,239 | 2.56 | ||||||||||||
Total earning assets |
10,076,310 | 3.61 | 9,236,682 | 4.04 | ||||||||||||
Allowance for loan losses |
(67,809 | ) | (55,651 | ) | ||||||||||||
Other assets |
946,802 | 849,803 | ||||||||||||||
Total assets |
$ | 10,955,303 | $ | 10,030,834 | ||||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||
Interest-bearing deposits |
$ | 5,583,440 | 0.62 | % | $ | 5,172,665 | 1.00 | % | ||||||||
Federal funds and repurchase agreements |
1,398,633 | 0.14 | 1,364,476 | 0.16 | ||||||||||||
Borrowed funds |
43,463 | 1.36 | 52,502 | 2.90 | ||||||||||||
Total interest-bearing liabilities |
7,025,536 | 0.53 | 6,589,643 | 0.84 | ||||||||||||
Noninterest-bearing demand deposits |
2,743,050 | 2,333,091 | ||||||||||||||
Other liabilities |
128,129 | 108,397 | ||||||||||||||
Shareholders equity |
1,058,588 | 999,703 | ||||||||||||||
Total liabilities and shareholders equity |
$ | 10,955,303 | $ | 10,030,834 | ||||||||||||
Net interest spread |
3.08 | % | 3.20 | % | ||||||||||||
Net interest margin |
3.24 | 3.44 |
Table 2 presents the dollar amount of change in net interest income and margin due to volume and rate. Table 2 also reflects the effect that interest-free funds have on net interest margin. Although interest-free funds (total earning assets less interest-bearing liabilities) increased $404.3 million for the three-month period ended September 30, 2010 compared to the same period in 2009 and increased $403.7 million for the nine-month period ended September 30, 2010 compared to the same period in 2009, the benefit from interest free funds declined by 9 basis points from the three months ended September 30, 2009, and declined by 8 basis points from the nine months ended September 30, 2009, due to decreases in interest rates.
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Table 2
ANALYSIS OF CHANGES IN NET INTEREST INCOME AND MARGIN (unaudited, dollars in thousands)
ANALYSIS OF CHANGES IN NET INTEREST INCOME
Three Months Ended September 30, 2010 vs. 2009 |
Nine Months Ended September 30, 2010 vs. 2009 |
|||||||||||||||||||||||
Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||
Change in interest earned on: |
||||||||||||||||||||||||
Loans |
$ | 2,680 | $ | (577 | ) | $ | 2,103 | $ | 1,935 | $ | 3,265 | $ | 5,200 | |||||||||||
Securities: |
||||||||||||||||||||||||
Taxable |
4,735 | (8,164 | ) | (3,429 | ) | 9,403 | (21,497 | ) | (12,094 | ) | ||||||||||||||
Tax-exempt |
1,157 | (1,381 | ) | (224 | ) | 3,535 | (3,602 | ) | (67 | ) | ||||||||||||||
Federal funds sold and resell agreements |
(21 | ) | 2 | (19 | ) | (15 | ) | (77 | ) | (92 | ) | |||||||||||||
Interest-bearing due from banks |
(222 | ) | (210 | ) | (432 | ) | 732 | (598 | ) | 134 | ||||||||||||||
Trading |
21 | (55 | ) | (34 | ) | 39 | (109 | ) | (70 | ) | ||||||||||||||
Interest income |
8,350 | (10,385 | ) | (2,035 | ) | 15,629 | (22,618 | ) | (6,989 | ) | ||||||||||||||
Change in interest incurred on: |
||||||||||||||||||||||||
Interest-bearing deposits |
571 | (4,894 | ) | (4,323 | ) | 1,912 | (14,583 | ) | (12,671 | ) | ||||||||||||||
Federal funds purchased and repurchase agreements |
99 | (20 | ) | 79 | 36 | (206 | ) | (170 | ) | |||||||||||||||
Borrowed funds |
(31 | ) | (247 | ) | (278 | ) | (92 | ) | (605 | ) | (697 | ) | ||||||||||||
Interest expense |
639 | (5,161 | ) | (4,522 | ) | 1,856 | (15,394 | ) | (13,538 | ) | ||||||||||||||
Net interest income |
$ | 7,711 | $ | (5,224 | ) | $ | 2,487 | $ | 13,773 | $ | (7,224 | ) | $ | 6,549 | ||||||||||
ANALYSIS OF NET INTEREST MARGIN
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||||||||||
2010 | 2009 | Change | 2010 | 2009 | Change | |||||||||||||||||||
Average earning assets |
$ | 10,134,217 | $ | 9,066,111 | $ | 1,068,106 | $ | 10,076,310 | $ | 9,236,682 | $ | 839,628 | ||||||||||||
Average interest-bearing liabilities |
7,070,469 | 6,406,668 | 663,801 | 7,025,536 | 6,589,643 | 435,893 | ||||||||||||||||||
Average interest free funds |
$ | 3,063,748 | $ | 2,659,443 | $ | 404,305 | $ | 3,050,774 | $ | 2,647,039 | $ | 403,735 | ||||||||||||
Free funds ratio (free funds to earning assets) |
30.23 | % | 29.33 | % | 0.90 | % | 30.28 | % | 28.66 | % | 1.62 | % | ||||||||||||
Tax-equivalent yield on earning assets |
3.56 | 4.08 | (0.52 | )% | 3.61 | % | 4.04 | % | (0.43 | )% | ||||||||||||||
Cost of interest-bearing liabilities |
0.48 | 0.81 | (0.33 | ) | 0.53 | 0.84 | (0.31 | ) | ||||||||||||||||
Net interest spread |
3.08 | % | 3.27 | % | (0.19 | )% | 3.08 | % | 3.20 | % | (0.12 | )% | ||||||||||||
Benefit of interest-free funds |
0.15 | 0.24 | (0.09 | ) | 0.16 | 0.24 | (0.08 | ) | ||||||||||||||||
Net interest margin |
3.23 | % | 3.51 | % | (0.28 | )% | 3.24 | % | 3.44 | % | (0.20 | )% | ||||||||||||
Provision and Allowance for Loan Losses
The allowance for loan losses (ALL) represents managements judgment of the losses inherent in the Companys loan portfolio as of the balance sheet date. An analysis is performed quarterly to determine the appropriate balance of the ALL. This analysis considers items such as historical loss trends, a review of individual loans, migration analysis, current economic conditions, loan growth and characteristics, industry or segment concentration and other factors. This analysis is performed separately for each bank as regulatory agencies require
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that the adequacy of the ALL be maintained on a bank-by-bank basis. After the balance sheet analysis is performed for the ALL, the provision for loan losses is computed as the amount required to adjust the ALL to the appropriate level.
Based on the factors above, management of the Company expensed $7.7 million and $24.1 million related to the provision for loan losses for the three and nine-month periods ended September 30, 2010, compared to $8.3 million and $20.6 million for the same periods in 2009. As illustrated in Table 3 below, the ALL increased to 1.59 percent of total loans as of September 30, 2010, compared to 1.36 percent of total loans as of the same period in 2009.
Table 3 presents a summary of the Companys ALL for the nine months ended September 30, 2010 and 2009 and for the year ended December 31, 2009. Net charge-offs were $15.5 million for the first nine months of 2010, compared to $14.1 million for the same period in 2009. See Credit Risk Management under Item 3. Quantitative and Qualitative Disclosures About Market Risk in this report for information relating to nonaccrual loans, past due loans, restructured loans and other credit risk matters.
Table 3
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (unaudited, dollars in thousands)
Nine Months Ended September 30, |
Year Ended December 31, |
|||||||||||
2010 | 2009 | 2009 | ||||||||||
Allowance-January 1 |
$ | 64,139 | $ | 52,297 | $ | 52,297 | ||||||
Provision for loan losses |
24,110 | 20,600 | 32,100 | |||||||||
Allowance of banks and loans acquired |
| | | |||||||||
Charge-offs: |
||||||||||||
Commercial |
(4,519 | ) | (3,716 | ) | (5,532 | ) | ||||||
Consumer: |
||||||||||||
Bankcard |
(11,353 | ) | (9,930 | ) | (13,625 | ) | ||||||
Other |
(2,525 | ) | (3,801 | ) | (4,911 | ) | ||||||
Real estate |
(27 | ) | (458 | ) | (881 | ) | ||||||
Total charge-offs |
(18,424 | ) | (17,905 | ) | (24,949 | ) | ||||||
Recoveries: |
||||||||||||
Commercial |
484 | 1,264 | 1,419 | |||||||||
Consumer: |
||||||||||||
Bankcard |
906 | 1,021 | 1,334 | |||||||||
Other |
1,503 | 1,534 | 1,936 | |||||||||
Real estate |
1 | 1 | 2 | |||||||||
Total recoveries |
2,894 | 3,820 | 4,691 | |||||||||
Net charge-offs |
(15,530 | ) | (14,085 | ) | (20,258 | ) | ||||||
Allowance-end of period |
72,719 | 58,812 | 64,139 | |||||||||
Average loans, net of unearned interest |
$ | 4,439,245 | $ | 4,380,906 | $ | 4,356,187 | ||||||
Loans at end of period, net of unearned interest |
4,583,562 | 4,314,977 | 4,314,705 | |||||||||
Allowance to loans at end of period |
1.59 | % | 1.36 | % | 1.49 | % | ||||||
Allowance as a multiple of net charge-offs |
3.50 | x | 3.12 | x | 3.17 | x | ||||||
Net charge-offs to: |
||||||||||||
Provision for loan losses |
64.41 | % | 68.37 | % | 63.11 | % | ||||||
Average loans |
0.47 | 0.43 | 0.47 |
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Noninterest Income
A key objective of the Company is the growth of noninterest income to enhance profitability through a diverse set of revenues. Fee-based services are typically non-credit related and not generally affected by fluctuations in interest rates.
The Companys fee-based services provide the opportunity to offer multiple products and services, which management believes will more closely align the customer with the Company. The Company is currently emphasizing fee-based services including trust and securities processing, bankcard, brokerage, health care services, and treasury management. Management believes it can offer these products and services both efficiently and profitably, as most share common platforms and support structures. Table 4 below summarizes the components of noninterest income and the respective year-over-year comparison for each category.
Table 4
SUMMARY OF NONINTEREST INCOME (dollars in thousands)
Three Months Ended September 30, | ||||||||||||||||
Dollar Change |
Percent Change |
|||||||||||||||
2010 | 2009 | 10-09 | 10-09 | |||||||||||||
Trust and securities processing |
$ | 39,843 | $ | 32,630 | $ | 7,213 | 22.11 | % | ||||||||
Trading and investment banking |
7,897 | 6,787 | 1,110 | 16.35 | ||||||||||||
Service charges on deposits |
19,431 | 20,598 | (1,167 | ) | (5.67 | ) | ||||||||||
Insurance fees and commissions |
1,554 | 1,255 | 299 | 23.82 | ||||||||||||
Brokerage fees |
1,746 | 1,629 | 117 | 7.18 | ||||||||||||
Bankcard fees |
14,555 | 11,671 | 2,884 | 24.71 | ||||||||||||
Gains on sale of securities available for sale, net |
752 | 3,306 | (2,554 | ) | (77.25 | ) | ||||||||||
Other |
4,306 | 2,642 | 1,664 | 62.98 | ||||||||||||
Total noninterest income |
$ | 90,084 | $ | 80,518 | $ | 9,566 | 11.88 | % | ||||||||
Nine Months Ended September 30, | ||||||||||||||||
Dollar Change |
Percent Change |
|||||||||||||||
2010 | 2009 | 10-09 | 10-09 | |||||||||||||
Trust and securities processing |
$ | 114,029 | $ | 86,164 | $ | 27,865 | 32.34 | % | ||||||||
Trading and investment banking |
20,454 | 20,625 | (171 | ) | (0.83 | ) | ||||||||||
Service charges on deposits |
60,114 | 62,527 | (2,413 | ) | (3.86 | ) | ||||||||||
Insurance fees and commissions |
4,540 | 3,710 | 830 | 22.37 | ||||||||||||
Brokerage fees |
4,679 | 5,493 | (814 | ) | (14.82 | ) | ||||||||||
Bankcard fees |
40,554 | 33,760 | 6,794 | 20.12 | ||||||||||||
Gains on sale of securities available for sale, net |
7,270 | 5,198 | 2,072 | 39.86 | ||||||||||||
Other |
13,950 | 9,273 | 4,677 | 50.44 | ||||||||||||
Total noninterest income |
$ | 265,590 | $ | 226,750 | $ | 38,840 | 17.13 | % | ||||||||
Fee-based, or noninterest income (summarized in Table 4), increased by $9.6 million, or 11.9 percent, during the three months ended September 30, 2010, and increased by $38.8 million, or 17.1 percent, during the nine months ended September 30, 2010, compared to the same periods in 2009.
Trust and securities processing consists of fees earned on personal and corporate trust accounts, custody of securities services, trust investments and money management services, and servicing of mutual fund assets. The increase in these fees for the three and nine-month periods compared to the same periods last year was primarily attributable to an increase in fee income from Scout Funds, fund administration and custody services, and fee
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revenue from the newly acquired Prairie Capital Management, LLC. Fee income from the Scout Funds for the three and nine-month periods ended September 30, 2010, increased by $3.2 million, or 36.0 percent, and by $11.5 million, or 49.6 percent, respectively. Fund administration and custody services fees for the three and nine-month periods ended September 30, 2010, increased by $1.8 million, or 12.9 percent, and $12.7 million, or 37.5 percent, respectively. Trust and securities processing fees are asset-based. As such, they are highly correlated to the change in market value of the assets. Thus, the related income for the remainder of the year will be affected by changes in the securities markets. Management continues to emphasize sales of services to both new and existing clients as well as increasing and improving the distribution channels, which lead to increased inflows into the Scout Funds.
Service charges on deposits decreased by $1.2 million, or 5.7 percent, and by $2.4 million, or 3.9 percent for the three and nine months ended September 30, 2010, compared to the same periods one year ago. This decrease is primarily due to new overdraft regulations enacted on July 21, 2010.
Bankcard fees increased by $2.9 million, or 24.7 percent, and by $6.8 million, or 20.1 percent for the three and nine months ended September 30, 2010, compared to the same periods one year ago. This increase is directly associated with the acquisition of credit card portfolios during the periods.
During the three months ended September 30, 2010, $0.8 million in pre-tax gains were recognized on the sales of securities available for sale, compared to $3.3 million during the same period in 2009. For the first nine months of 2010, $7.5 million in pre-tax gains were recognized on the sales of securities available for sale, compared to $5.2 million during the same period in 2009. These sales are part of an objective to monitor and control the Companys interest rate sensitivity in an anticipated rising interest rate environment.
Noninterest Expense
The components of noninterest expense are shown below on Table 5.
Table 5
SUMMARY OF NONINTEREST EXPENSE (in thousands)
Three Months Ended September 30, | ||||||||||||||||
Dollar Change |
Percent Change |
|||||||||||||||
2010 | 2009 | 10-09 | 10-09 | |||||||||||||
Salaries and employee benefits |
$ | 69,044 | $ | 60,193 | $ | 8,851 | 14.70 | % | ||||||||
Occupancy, net |
9,162 | 8,982 | 180 | 2.00 | ||||||||||||
Equipment |
11,122 | 11,187 | (65 | ) | (0.58 | ) | ||||||||||
Supplies and services |
4,822 | 4,787 | 35 | 0.73 | ||||||||||||
Marketing and business development |
4,426 | 4,036 | 390 | 9.66 | ||||||||||||
Processing fees |
11,570 | 9,659 | 1,911 | 19.78 | ||||||||||||
Legal and consulting |
4,108 | 2,763 | 1,345 | 48.68 | ||||||||||||
Bankcard |
4,292 | 3,615 | 677 | 18.73 | ||||||||||||
Amortization of other intangibles |
3,150 | 1,847 | 1,303 | 70.55 | ||||||||||||
Regulatory fees |
3,219 | 3,036 | 183 | 6.03 | ||||||||||||
Other |
5,720 | 5,152 | 568 | 11.02 | ||||||||||||
Total noninterest expense |
$ | 130,635 | $ | 115,257 | $ | 15,378 | 13.34 | % | ||||||||
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Nine Months Ended September 30, | ||||||||||||||||
Dollar Change |
Percent Change |
|||||||||||||||
2010 | 2009 | 10-09 | 10-09 | |||||||||||||
Salaries and employee benefits |
$ | 194,849 | $ | 177,786 | $ | 17,063 | 9.60 | % | ||||||||
Occupancy, net |
27,007 | 25,698 | 1,309 | 5.09 | ||||||||||||
Equipment |
33,205 | 36,181 | (2,976 | ) | (8.23 | ) | ||||||||||
Supplies and services |
14,209 | 15,734 | (1,525 | ) | (9.69 | ) | ||||||||||
Marketing and business development |
12,561 | 11,397 | 1,164 | 10.21 | ||||||||||||
Processing fees |
33,812 | 24,803 | 9,009 | 36.32 | ||||||||||||
Legal and consulting |
8,500 | 6,954 | 1,546 | 22.23 | ||||||||||||
Bankcard |
11,842 | 10,498 | 1,344 | 12.80 | ||||||||||||
Amortization of other intangibles |
7,684 | 4,318 | 3,366 | 77.95 | ||||||||||||
Regulatory fees |
9,974 | 12,672 | (2,698 | ) | (21.29 | ) | ||||||||||
Other |
20,470 | 14,738 | 5,732 | 38.89 | ||||||||||||
Total noninterest expense |
$ | 374,113 | $ | 340,779 | $ | 33,334 | 9.78 | % | ||||||||
Noninterest expense increased by $15.4 million, or 13.3 percent, for the three months ended September 30, 2010, and by $33.3 million, or 9.8 percent, for the nine months ended September 30, 2010, compared to the same period in 2009. Table 5 above summarizes the components of noninterest expense and the respective year-over-year comparison for each category.
Salaries and employee benefits increased by $8.9 million, or 14.7 percent, for the three months ended September 30, 2010, and by $17.1 million, or 9.6 percent, for the nine months ended September 30, 2010, compared to the same period in 2009. These increases are primarily due to higher base salary, commission, and health insurance costs. Within each of these categories is the direct impact from the acquisitions during the periods. Salaries increased by $3.5 million, or 7.0 percent, and $5.9 million, or 4.8 percent, for the three and nine months ended September 30, 2010, compared to the same periods in 2009. Commissions and bonuses increased by $5.1 million, or 31.3 percent, and $8.0 million, or 35.6 percent, for the three and nine months ended September 30, 2010, compared to the same periods in 2009. Employee benefits costs increased by $0.4 million, or 4.0 percent, and $2.1 million, or 7.1 percent, for the three and nine months ended September 30, 2010, compared to the same periods in 2009.
Processing fees increased $1.9 million, or 19.8 percent, for the three months ended September 30, 2010, and by $9.0 million, or 36.3 percent, for the nine months ended September 30, 2010, compared to the same period in 2009. This increase, which is correlated to the increase in trust and securities processing income noted above, is due to increased third party custodian fees related to international transactions from mutual fund clients and fees paid by the advisor to third-party distributors of the Scout Funds.
Income Tax Expense
The effective tax rate is 27.4 percent for the nine months ended September 30, 2010, compared to 27.6 percent for the same period in 2009.
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Strategic Lines of Business
Table 6
NET INCOME (LOSS) BEFORE TAXES BY SEGMENT (in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Segment |
||||||||||||||||
Commercial Financial Services |
$ | 15,912 | $ | 15,755 | $ | 45,616 | $ | 46,370 | ||||||||
Institutional Financial Services |
11,634 | 12,667 | 38,112 | 41,703 | ||||||||||||
Personal Financial Services |
2,060 | 155 | 13,059 | (780 | ) | |||||||||||
Treasury and Other Adjustments |
526 | 4,280 | 2,406 | 3,355 | ||||||||||||
Total Consolidated Company |
$ | 30,132 | $ | 32,857 | $ | 99,193 | $ | 90,648 | ||||||||
Commercial Financial Services net income before taxes decreased $0.8 million, or 1.6 percent, to $45.6 million for the nine months ended September 30, 2010. The decrease in net income was driven primarily by an increase in noninterest expense of $4.9 million, or 6.0 percent, offset by a decrease in provision for loan loss of $1.9 million, or 18.7 percent, an increase in net interest income of $0.9 million, or 0.8 percent, and an increase in noninterest income of $1.4 million, or 5.5 percent. Noninterest expense increased due to higher allocated overhead costs compared to 2009. Total earning asset balances are up over the prior year by $40.0 million, or 1.2 percent; whereas, deposits and repurchase agreements increased by $206.0 million, 6.2 percent. Volume increases on both sides of the balance sheet are driving the increase in net interest margin. Noninterest income increased due to higher loan fees.
Institutional Financial Services net income before taxes decreased $3.6 million to $38.1 million from the same period in 2009. Noninterest income increased $33.2 million, offset by a $27.7 million increase in noninterest expense and a $4.3 million decrease in net interest income. Noninterest income increased due to a $11.5 million increase in advisory fees associated with the Scout Funds and a $12.7 million increase in fund administration and custody services income. Scout Fund fee income increased due to inflows of $1.1 billion for the nine months ended September 30, 2010 and overall market appreciation over last year. Fee income from the acquisition of J.D. Clark & Co., Inc. and market appreciation were the drivers of the increase in fund administration and custody services income compared to 2009. Credit card income increased $4.9 million due to increased processing fees. Credit card balances increased approximately $121.0 million compared to 2009 primarily from the acquisition of 5 credit card portfolios totaling approximately $90.0 million over the past year. Noninterest expense increased $3.4 million from third party custodial fees related to international transactions from mutual fund clients and increased $3.7 million in third party fees paid by the advisor to distributors of the Scout Funds. The other driver was an increase in salaries and benefits of $14.0 million due to increased commission expense related to the increased revenue in this segment as well as the addition of base salary expenses from the acquisition of J.D. Clark & Co., Inc. Net interest income decreased due to decreased funds transfer pricing on deposits in this segment.
Personal Financial Services net income before taxes increased by $13.8 million to $13.1 million compared to 2009. Several drivers contributed to this increase. Earning asset balances have decreased, but the rate of the decrease has slowed in 2010 as the indirect automobile portfolio runoff is slowing. This is offset by the growth in the home equity loan portfolio. Net interest income increased $10.0 million, or 14.6 percent, over 2009 due to decreased funds transfer pricing costs on assets and an increased funds transfer pricing on deposits in this segment. The deposit balances have also increased in this segment compared to 2009. Noninterest income increased $1.9 million, or 2.7 percent, from 2009. This increase was due to an increase in trust fee income related to the acquisition of Prairie Capital Management, LLC. This increase was offset by a reduction in deposit service charges as a result of changes in consumer behavior as a result of the new overdraft legislation that became effective during the quarter. Noninterest expense decreased $2.7 million, or 2.0 percent, over 2009. The decrease was primarily due to a decreased salaries and benefits expenses and decreased allocated overhead expenses.
The net income before tax for the Treasury and Other Adjustments category was $2.4 million for the first nine months of 2010, compared to net income before tax of $3.4 million for the same period in 2009.
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Balance Sheet Analysis
Total assets of the Company as of September 30, 2010 decreased $323.3 million compared to December 31, 2009 and increased $1.1 million, or 10.8 percent, compared to September 30, 2009. The increase in total assets from September 2009 to September 2010 is a result of increased investment securities balances including trading securities of $678.8 million, or 15.1 percent. This asset balance increase is directly related to a corresponding increase in deposit balances between the same periods of $711.6 million, or 9.0 percent, and an increase in fed funds purchased and repurchase agreements of $285.5 million, or 24.9 percent. The decrease in total assets from December to September is primarily a result of the cyclical trend due to the pledging of investment securities and collateral required related to seasonal public fund repurchase agreements and deposits.
Total deposits increased slightly and federal funds purchased and securities sold under agreement to repurchase declined at September 30, 2010 compared to December 31, 2009. Deposits increased by $67.3 million, or 0.8 percent, from December to September, and federal funds purchased and securities sold under agreement to repurchase decreased by $495.4 million, or 25.7 percent, from December to September. This decline in securities sold under agreement to repurchase is primarily driven by the run-off of seasonal public fund tax deposits, as such tax deposits are generally higher around the end of the calendar year.
Table 7
SELECTED BALANCE SHEET INFORMATION (unaudited, dollars in thousands)
September 30, | December
31, 2009 |
|||||||||||
2010 | 2009 | |||||||||||
Total assets |
$ | 11,340,041 | $ | 10,235,496 | $ | 11,663,355 | ||||||
Loans, net of unearned interest |
4,583,562 | 4,314,977 | 4,314,705 | |||||||||
Total investment securities |
5,181,441 | 4,502,596 | 5,003,720 | |||||||||
Interest-bearing due from banks |
658,347 | 539,357 | 1,057,195 | |||||||||
Total earning assets |
10,384,286 | 9,421,482 | 10,658,769 | |||||||||
Total deposits |
8,601,815 | 7,890,189 | 8,534,488 | |||||||||
Total borrowed funds |
1,469,066 | 1,199,370 | 1,982,579 |
Loans
Loans represent the Companys largest source of interest income. In addition to growing the commercial loan portfolio, management believes its middle market commercial business and its consumer business, including home equity and credit card loan products, are the market niches that represent its best opportunity to cross-sell fee-related services.
Total loan balances have increased $268.9 million, or 6.2 percent, compared to December 31, 2009 and increased $268.6 million, or 6.2 percent, at September 30, 2010 compared to September 30, 2009. The increase from December 31, 2009 is primarily a result of a 3.8 percent increase in commercial loans and a 11.4 percent increase in real estate loans. The increase at September 30, 2010 compared to September 30, 2009 was primarily related to a $242.3 million increase in real estate loans and a $38.1 million decrease in consumer loans. The increase in real estate loans is driven by home equity loans and commercial real estate loans.
Nonaccrual, past due and restructured loans are discussed under Credit Risk Management within Item 3. Quantitative and Qualitative Disclosures About Market Risk in this report.
Securities
The Companys securities portfolio provides liquidity as a result of the composition and average life of the underlying securities. This liquidity can be used to fund loan growth or to offset the outflow of traditional funding sources. In addition to providing a potential source of liquidity, the securities portfolio can be used as a tool to manage interest rate sensitivity. The Companys goal in the management of its securities portfolio is to maximize return within the Companys parameters of liquidity goals, interest rate risk and credit risk. The Company maintains strong liquidity levels while investing in only high-grade securities. The securities portfolio generates the Companys second largest component of interest income.
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Investment securities totaled $5.2 billion at September 30, 2010, compared to $4.5 billion at September 30, 2009, and $5.0 billion at December 31, 2009. Collateral pledging requirements for public funds, loan demand, and deposit funding are the primary factors impacting changes in the level of security holdings. Investment securities comprised 49.9 percent, 46.9 percent, and 47.8 percent, respectively, of the earning assets as of September 30, 2010, December 31, 2009, and September 30, 2009. There were $3.6 billion of these securities pledged to secure U.S. Government deposits, other public deposits, securities sold under repurchase agreements, and certain trust deposits as required by law at September 30, 2010.
Investment securities had an average tax-equivalent yield of 2.77 percent for the first nine months of 2010 compared to 3.57 percent for the same period in 2009, or a decrease of 80 basis points. The average life of the securities portfolio was 26.7 months at September 30, 2010 compared to 22.9 months at December 31, 2009 and 24.2 months at September 30, 2009. The increase in average life from September 30, 2009 was related to a modest lengthening of the portfolio due to a lower percentage of short term investments held in the portfolio compared to the same period last year.
Deposits and Borrowed Funds
Deposits increased $67.3 million, or 0.8 percent, from December 31, 2009 to September 30, 2010 and increased $711.6 million from September 30, 2009. Noninterest-bearing deposits were flat and interest-bearing deposits increased $63.8 million from December 31, 2009. Noninterest-bearing deposits increased $184.1 million and interest-bearing deposits increased $527.5 million from September 30, 2009. The increase in deposits from September 30, 2009 came primarily from the public funds, mutual fund processing and treasury management businesses.
Deposits represent the Companys primary funding source for its asset base. In addition to the core deposits garnered by the Companys retail branch structure, the Company continues to focus on its cash management services, as well as its trust and mutual fund services in order to attract and retain additional core deposits. Management believes a strong core deposit composition is one of the Companys key competencies given its competitive product mix.
Borrowed funds decreased $513.5 million from December 31, 2009. Borrowed funds are typically higher at year end due to repurchase agreements related to public funds. Borrowings, other than repurchase agreements, are a function of the source and use of funds and will fluctuate to cover short term gaps in funding.
Federal funds purchased and securities sold under agreement to repurchase totaled $1.4 billion at September 30, 2010, compared to $1.9 billion at December 31, 2009. Repurchase agreements are transactions involving the exchange of investment funds by the customer for securities by the Company under an agreement to repurchase the same or similar issues at an agreed-upon price and date.
Capital and Liquidity
The Company places a significant emphasis on the maintenance of a strong capital position, which promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Companys ability to capitalize on business growth and acquisition opportunities. Higher levels of liquidity, however, bear corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets and higher expenses for extended liability maturities. The Company manages capital for each subsidiary based upon the subsidiarys respective risks and growth opportunities as well as regulatory requirements.
Total shareholders equity was $1.1 billion at September 30, 2010, a $74.6 million increase compared to December 31, 2009. The Companys Board of Directors authorized, at its April 27, 2010, April 21, 2009, and April 22, 2008 meetings, the repurchase of up to two million shares of the Companys common stock during the twelve months following the meetings. During the nine months ended September 30, 2010 and 2009, the Company acquired 201,518 shares and 689,743 shares, respectively, of its common stock under these plans. The Company has not made any purchases other than through these plans.
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On October 26, 2010, the Board of Directors declared a dividend of $0.195 per share. The dividend will be paid on December 30, 2010 to shareholders of record on December 10, 2010.
Risk-based capital guidelines established by regulatory agencies set minimum capital standards based on the level of risk associated with a financial institutions assets. A financial institutions total capital is required to equal at least 8 percent of risk-weighted assets and must be at least 10 percent of risk-weighted assets to be considered well-capitalized. At least half of the 8 percent minimum must consist of Tier 1 core capital, and the remainder may be Tier 2 supplementary capital. The risk-based capital guidelines indicate the specific risk weightings by type of asset. Certain off-balance-sheet items (such as standby letters of credit and binding loan commitments) are multiplied by credit conversion factors to translate them into balance sheet equivalents before assigning them specific risk weightings. Due to the Companys high level of core capital and substantial portion of earning assets invested in government securities, the Tier 1 capital ratio of 12.61 percent and total capital ratio of 13.78 percent substantially exceed the regulatory minimums.
For further discussion of capital and liquidity, see Liquidity Risk under Item 3. Quantitative and Qualitative Disclosures About Market Risk in this report.
Table 8
The Companys capital position is summarized in the table below and exceeds regulatory requirements:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
RATIOS |
2010 | 2009 | 2010 | 2009 | ||||||||||||
Return on average assets |
0.82 | % | 0.97 | % | 0.88 | % | 0.87 | % | ||||||||
Return on average equity |
8.31 | 9.43 | 9.09 | 8.78 | ||||||||||||
Average equity to assets |
9.88 | 10.26 | 9.66 | 9.97 | ||||||||||||
Tier 1 risk-based capital ratio |
12.61 | 13.50 | 12.61 | 13.50 | ||||||||||||
Total risk-based capital ratio |
13.78 | 14.51 |